Intertek Group plc (ITRK) Earnings Call Transcript & Summary

Hello, and welcome to the Intertek 2022 Half Year Results. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions]. I will now hand over to your host, Andre Lacroix, to begin today's call.

Good morning to you all, and thanks for joining us on our call. I have with me Jonathan Timmis, our CFO; and Denis Moreau, our VP of Investor Relations. There are 5 takeaways in our today's presentation. The first takeaway is that the group delivered a robust financial performance in H1, notwithstanding the impact of lockdown restrictions in China, we delivered at constant currency, a revenue growth of 9.5%, like-for-like revenue growth of 4.9%, and EPS growth of 6.7%, a robust free cash flow and an excellent ROIC. Outside of China, the group delivered like-for-like growth of 7.1%, one of the best like-for-like performance for many years at Intertek, a double-digit operating profit growth and importantly, a 20% -- 20 basis point margin accretion. The second takeaway is our business in Shanghai has been operating as normal from July 1, as expected, and we expect our China business to deliver good like-for-like revenue growth in H2. The third takeaway is our acquisitions are performing extremely well in revenue and margin. We are really proud of having SAI and GLA in our portfolio, 2 major acquisitions in high margin segments. And this morning, we've announced an agreement to acquire CEA, a market-leading independent provider of quality assurance in a very exciting, fast-growing solar energy sector. As we all know, solar energy is the future for the world of energy. The fourth takeaway is for the full year. We are targeting robust like-for-like revenue growth at constant rates. And given the impact of the lockdown restrictions in China in H1, the expected divisional mix and the investments in growth we are making, we expect margin to be slightly below 2021. Our disciplined cost management remains, of course, in place, and we'll continue to leverage our strong pricing power to manage the higher-than-expected inflation in several markets where we are investing in capability. Net-net, we expect the group to deliver at constant rate a robust earnings growth in 2022. And the fifth takeaway, really important for the future of the company, the ATIC quality assurance market is growing faster post COVID. The expectations of all stakeholders in quality, safety and sustainability are much higher, and this is great news for our ATIC portfolio. So let's start with our performance highlights. The robust financial performance of the group in H1 I just discussed demonstrating the strengths of our high-quality growth business model. In the first 6 months, we delivered a revenue of GBP 1.5 billion, 9.5% up year-on-year at constant rate, as I said, and 13% actual rate. Our group operating margin was resilient at 14.6%. Earning growth was 6.7% at constant rate and 10.6% at actual rates. Our free cash flow of close to GBP 96 million was robust. We've announced an interim dividend in line with what we paid in the last 3 years, and our ROIC was excellent at 16.8% with organic ROIC 21.4%, 20 basis points higher than last year. And of course, our balance sheet remains super strong. We've delivered a broad-based mid-single-digit like-for-like revenue growth of 4.9%, Product up 4.3%, Trade up 5.7% and Resources up 6.7% (sic) [ 6.4% ]. Our robust like-for-like revenue growth was driven by progress both on volume and price. You heard me talk about it for many, many years. We believe in good like-for-like revenue growth, getting both volume, price and the benefit of mix. Outside of China, we benefited from an acceleration of demand for ATIC solutions with a like-for-like growth of at least 7% in each of our divisions, a performance that Intertek has not delivered for quite a while. So I'm really proud of this like-for-like performance given the acceleration of demand for our solutions in the market. And of course, we are pleased to see the acceleration in terms of like-for-like revenue momentum in the May-June period for our trade and resource businesses. In H1, we saw a margin reduction of 70 basis points at the group level, driven solely by the impact of the COVID-19 restriction in China. Outside of China, we delivered a good margin performance with a margin accretion of 20 basis points. We benefited from our strong pricing power as we executed the price increase we had planned to take in the first half and of course, as we remain very disciplined on our cost management. I'll now hand over to Jonathan to discuss our H1 results in more detail.

Thank you, Andre. In summary, in half 1 2022, the group delivered strong revenue with a robust EPS growth. Total revenue growth was 9.5% at constant currency and 13.2% at actual rates, as beneficial movements in FX rates impacted our revenue by 370 basis points, driven by the weakening of sterling. Like-for-like revenue grew 4.9% at constant rates. Operating profit at constant rates was 4% -- was up 4% to GBP 217 million, delivering a margin of 14.6%, down year-on-year by 70 basis points. Diluted earnings per share were 86.5p, growth of 6.7% at constant rates and 10.6% at actual rates. I will now take you through the high-level operating margin performance by division. Products performance was impacted by lockdown restrictions between March and June in our China business, especially in Shanghai, which represents 25% of our China business. Margins were 19.3%, which adversely impacted the group by 110 basis points. Trade operating margin grew to 7.6% and contributed a 20 basis points increase to the group margin, while a decline in operating margin in resources to 4.7% had no year-on-year effect at group level. Finally, our recent acquisitions had a positive 10 basis points impact on group margin. The group delivered adjusted free cash flow of GBP 95.8 million, down year-on-year by GBP 26.8 million. A good increase in operating profit was offset by an increase in working capital. In half 1 2022, we invested GBP 41 million in CapEx in line with prior year. We finished half 1 2022 with financial net debt of GBP 859 million, which is up year-on-year due to the acquisition of SAI and represents a financial net debt to adjusted EBITDA ratio of 1.3x. We have a robust financing structure in place. We have a good average debt maturity of 4.5 years with an even spread of maturities. 83% of our debt is at fixed interest rates with an average rate of 2.7%. Now turning to our financial guidance for 2022. We expect net finance costs to be in the range of GBP 34 million to GBP 38 million. We expect our effective tax rate to be between 26.5% and 27%, our minority interest to be between GBP 20 million and GBP 22 million and CapEx investments to be in the range of GBP 125 million to GBP 135 million. Our financial net debt guidance, excluding future changes in FX rates or M&A, is updated to GBP 730 million to GBP 780 million as a result of the weakening pound against our predominantly U.S. denominated debt. I will now hand back to Andre.

Thank you, Jonathan. And let's now discuss the performance of our business lines, starting with our Products business. All comments that we'll make as usual in this section are at constant currency. In H1, our Products business delivered a robust performance. Our revenue benefited from the high demand for ATIC solutions and, of course, from the acquisition that we have made recently, enabling us to deliver revenue growth of 11.5%. For the period, like-for-like revenue growth of 4.3% globally. Outside of China, we delivered a like-for-like revenue growth of 7%, driven by double-digit growth in Softline and Business Assurance, 2 of our star businesses, high single-digit growth in Food, mid-single-digit growth in building construction as well as chemical and pharma, low single-digit growth in high-line Electrical and Transportation Technology. Our margin in H1 was 19.3%, down 170 basis points due to the impact of the lockdown restrictions in China, of course. In 2022, we expect our Products division to deliver robust like-for-like revenue growth. Moving to Trade. Following a good 2021, driven by the rebound of global trade, our Trade division benefited from a growth acceleration, enabling us to deliver a good margin accretion. The higher demand for energy and Agri products drove like-for-like revenue growth of 5.7% globally and 7.2% outside of China. Operating margin of 7.6% was up 90 basis points. In 2022, we expect our trade divisions to deliver robust like-for-like revenue growth. Just a few remarks regarding the conflict in Ukraine, our exposure to Russia and Ukraine is small, less than 1% of the group revenue. The war, however, will continue to impact the global energy supply chain and the global food supply. Russia, as we know, is a major producer of oil and gas, and the export activities, represent around 7% of the world consumption. Following the sanctions implemented, we expect to see the following challenges in the global energy market. The amount of oil and gas exported from Russia into Europe will reduce, of course. The amount of oil and gas exports from Russia into Asia will increase, and we're already seeing it. The overall amount of oil and gas export by Russia will reduce all the time. The production of oil and gas in the U.S. and Europe will, of course, increase. The amount of LNG important to Europe will increase. And importantly, investments in renewables in Europe will accelerate. For Intertek, the change in energy trade flows as well as increased investments in renewables will be a net positive for Caleb Brett and Industry Service operations. The war is also impacting the global food market as the conflict has disrupted the trade flows in the Black Sea in several categories, grains, oilseeds, veg oils and fertilizers. In the short-term, these disruptions are increasing pressure on price. Over time, this will be offset by an increase in production from major exporters like the EU, Argentina, Canada, U.S. and Morocco. This trade flow change will be a net positive for AgriWorld operation. In the resource sector, we've seen a high demand for ATIC solutions. There is no question our clients benefiting from the global recovery in oil and gas as well as minerals that enabled us to deliver 6.4% like-for-like revenue growth globally and 7.4% outside of China. Operating margin was slightly below last year, reflecting our investment in growth in Australia. In 2022, we expect our Resource business to deliver robust like-for-like revenue growth. Let's now discuss the outlook for 2022. The lockdown restrictions have had a significant impact in our China business between March and June and Shanghai was the most impacted region and as I said earlier, is now back to normal. We have an excellent business in China with leading and scale position and very strong margin across all of our businesses. And in H2, we expect our business to deliver good like-for-like revenue growth like we saw pre the restriction period. Globally, we are seeing an increase in demand for ATIC solutions in products, trade and resources. Our like-for-like revenue growth outside of China was 7.1%, enabling us to deliver double-digit operating profit growth and a margin accretion of 20 basis points, as I mentioned earlier. In 2022, we expect robust like-for-like revenue growth at the group level with robust like-for-like revenue growth in product, trade and resources. We continue to leverage our strong pricing power, especially in the markets where we're investing in capability to seize these extra growth opportunities and where we are facing higher-than-expected inflation. Our disciplined cost management will remain in place to continue to drive productivity improvements. Given the impact of China in H1, the expected divisional mix and the investment in growth we are making, our margin at constant currency will be slightly below 2021. For the margin model, I just want to remind you that the group benefited in 2021 from additional government subsidies in the orders of GBP 10.5 million as we disclosed at the end of the year, with 1/3 in H1 and 2/3 in H2. A brief update on currency, the average selling rate since the beginning of the year applies to the full year results of 2021 would provide an uplift between 400 bps and 600 bps at the revenue and earnings level. Net-net, we expect the group to deliver a robust earnings performance in H2 and for the full year at constant rate. Let's now move beyond 2022 and talk about the exciting growth outlook for Intertek. You only said that before, may let me just share my main insights. COVID-19 has been much more than the tragedy for the world. It will be remembered as the greatest dislocation of the global supply chain since the '70s, creating significant imbalances between supply and demand in raw materials, components, goods, service and manpower, resulting in higher-than-expected inflation across many markets. In the post-COVID world, stakeholders' expectations in quality, safety and sustainability are higher than ever, making the case for risk-based quality assurance stronger than ever. The ATIC demand will grow faster in a post-COVID world. And let me explain you why. Of course, we operate in a highly attractive industry with strong structural ATIC growth drivers that we know so well that they've delivered great performance for all stakeholders in this industry and will continue to deliver GDP+ like-for-like revenue growth in [indiscernible]. Based on our market research. And as you know, we do about 6,000 to 7,000 interviews a month with our customers with our NPS survey. These attractive structural ATIC growth drivers will be augmented by an increase in new clients, higher investments in safer supply, high investment in innovation, a step change in sustainability and high growth in the world of energy. Let me talk about these 5 accelerators one at a time. We are seeing a significant growth in a number of companies globally, given the ease of regulations to create new businesses, the lower barriers to entry for any brand with e-commerce capabilities, and the increased level of talent to develop new technology, new products and new services. The lack of quality assurance expertise of these young companies is great news for Intertek. Our decentralized customer-first organization has a strong track record indeed of winning new clients. And I don't know if you're aware of that, but on the second of November 2021, at the Cotswold Airport here in our home market in the U.K., we had the first flight powered by sustainable fuels. These synthetic fuels were developed by a company called Zero Petroleum, a startup here in the U.K. And they work with our experts to make sure that the fuel was proper and ready from a molecule development standpoint, safety and sustainability. This is the type of companies we partner with very early on at the early stage of their R&D work. And of course, they achieved a Guinness World Record. We are very proud of being partnered with Zero Petroleum, run by the fantastic CEO, very famous in the Formula One world, Paddy Lowe. Second, growth accelerator, increased investment in safe supplies. COVID-19 is proving a catalyst for many corporations to improve the resilience of their supply chains. We expect major corrective actions inside companies, better data on what's happening in all parts of the supply chain, cater risk management with regular shop business continuity planning, a more diversified portfolio of Tier 1, Tier 2, Tier 3 suppliers, a more diversified portfolio of factories, investment in processes, technology training and independent assurance, and we are really well positioned to help our clients reduce the intrinsic risk in their operations given our superior assurance offering. You know that we are the leader in terms of ATIC offering, and you've seen the tremendous growth of our Business Assurance business in the first half. Let me tell you a recent development with one of our major clients, and we cannot name our client. They don't let us do for, obviously, confidential and commercial sensitivity reasons. A few months ago, I got a call from the Head of Supply Chain at one of the major global luxury cosmetic headquarters in North America. And they were facing some real difficulties with quality and recall in their supply chain in China. They're called Intertek to basically not go and check what's happening in China, they also wanted us to do that, but they called us to basically do an end-to-end audit of the quality assurance management systems throughout their operation. And this is a fantastic company with a tremendous track record that they realized that they had intrinsic risk in their supply chain they will not deal from a systemic standpoint. That's the type of assurance work we do for our clients. Let's move to innovation. Our clients have realized that they need to invest more in product and service innovations to meet the changing needs of their customers. As you would expect, during a measurable crisis like COVID-19, consumers' expectations are changing given the desire to live in a much better world. A recent survey by Gartner show that 60% of the R&D leaders expect to increase their R&D spend in 2022. This investment innovation will result in a higher number of SKUs and a higher number of test SKUs, which will be, of course, beneficial for our product divisions. And we got tons of examples of clients coming to us to basically get our subject matter expertise early on in the R&D stage to develop their new products and solutions. The other major area of investment in site corporation is, of course, sustainability. Indeed, we have seen a positive momentum for sustainability with emerging regulations in addition to what has been put in place in the last few years. Companies will have to reinvent the way they manage the sustainability agenda with a great emphasis on independently verified ESG disclosures. This is an excellent development for industry-leading solutions in Assurance. And I'm not sure if you've seen in the recent development that has happened at the EU. As the CEO of Intertek, I'm part of the Tech Council, which is our global trade association and a share global sustainability efficacy group that basically work with regulators around the world to get higher sustainability reporting standards. And we just achieved a major win, which is an amendment to the 2014 nonfinancial reporting directive in the EU with basically a corporate sustainability directive that will get into effect from 2025 and 2024, that basically will force companies to have independent audited stability report. And the big win is that we have secured that our industry will be part of the 35 companies that can audit these reports. That's a major win. And you can imagine, we had a bit of competition for the big 4 that we want. Let's talk about the fleet growth accelerators, and I'm super energized about the opportunities there. These are the growth opportunities in the world of energy, which are truly exciting. A lot of commentary has been available in the press. So our insights will not be a surprise to you. But let's try to bring these key insights in a few succeed points to our discussion here. To meet the expected increase in global energy demand, the world needs a significant increase in energy production. There has been underinvestment in traditional oil and gas exploration and production in the last decade. And we know that renewables are great, but not scale. Therefore, investment for production in traditional oil and gas and renewables will increase significantly. There is no question that the investment and technology required to build a new infrastructure is very, very challenging from an IP standpoint and of course, funding standpoint. And there will be a divergence between the energy mix in developed and developing countries. In developing economies, we'll see growth in oil and gas, trade flows and infrastructure investments. The diversified energy mix in developing economies will increase the complexity and risk in a just-in-time energy value chain. We've seen quite a lot of examples of grids not being properly operational in the U.S. or here in the U.K. Watch the space, this is just the beginning of a new big risk, which is energy supply 24/7. To achieve net-zero, we expect a major acceleration in both technology and investments to create scale, carbon capture and storage infrastructure. The world will not get to net-zero unless there is a big, big, big, progress in terms of technology investments to basically capture carbon wherever the carbon is being emitted. The growth acceleration in the world of energy I just described is fantastic news for our Caleb Brett, Industry Services, Electrical and Assurance businesses. And you've seen this morning, the announcement we made in the Solar Energy segment, a very, very exciting space for us. So when you step back and you look at the ATIC structural growth drivers, the track record of the company and these growth accelerators, have to say we are extremely well positioned to seize the growth acceleration in our end market for many years to come. Our science-based customer excellence, USP, gives us excellent client relationship and a strong pricing power. We have a powerful portfolio with scale position in attractive growth segments, high-quality component earnings model, deliver sustainable value, as you know, and we are very agile with our disciplined performance management on price, cost and cash. And importantly, we invest in organic and inorganic growth with discipline. Investments are essential to remain the best in terms of customer service and to deliver superior ATIC solutions. Our teams are very focused on scaling up the winning innovations we've launched in the market over the last few years as well as developing the next big ideas for the industry. We're also scaling up our M&A investments successfully, as evidenced by our excellent ROIC. And we continue to look at new opportunities to invest in high-growth, high-margin sectors. And this morning, we've announced a significant role in the solar energy sector with the leader in the space. Moving forward, we'll continue to deliver sustainable growth and value for all of our stakeholders of science-based customer excellence USP is giving our clients the ATIC advantage that they need to strengthen their business. We operate a high-margin, capital-light, carbon-light and highly cash-generative earnings model. As you know, our approach to value creation is based on the compounding effect year-after-year of margin equity revenue growth, strong cash generation and disciplined investment in growth. That approach has delivered 13% annual TSR in the last decade, a tremendous performance. Moreover, our earnings model has strong intrinsic defensive characteristics. It's important to note that the ATIC solution we offer are mission-critical for our clients to make sure that their operations continue to operate safely. We operate a highly diversified set of revenue streams, offering a broad range of ATIC solutions in 17 industries in more than 100 countries working with slightly more than 400,000 companies around the world. And given our superior customer service, we have strong and lasting relationships with our clients. So in summary, we are a high-quality growth business with strong defensive characteristics creating value in good and challenging times. We are purpose-led, offering ATIC solutions that are mission-critical for the world. We operate a high performance earnings and cash compound model. And importantly, the growth in our end market is accelerating. We are extremely well positioned to continue to create sustainable value for all. Before I close, I would like to thank all of my colleagues at Intertek for the incredible commitment, passion, innovation, agility and energy, giving Intertek a science-based customer excellence advantage in the global quality assurance industry. Thank you for your attention, and we'll take any questions you might have.

[Operator Instructions] The first question comes from the line of Kate Carpenter from Bank of America.

A few from me. How much did pricing contribute to results this half? And how do you expect that to evolve through the remainder of the year? And similarly, any details that you can give around kind of where you're seeing wage inflation at this point would be very helpful. And then on the investments that you're making that you expect to impact margins this year. Could you just give a bit more color around that, which kind of specific divisions and operations and how long you expect that to kind of take before you see that translate through to higher revenue, and I'll leave it there.

Yes. Thanks. Look, I'll try to address the 3 points in 1 explanation. If you go back, right, in times, the way we decide to operate in 2020, when COVID-19 became a global issue, we basically made the assumption that COVID-19 was going to be a temporary disruption in the global supply chain of our clients. That was a big decision we made. And therefore, because we are an IP-based company in terms of customer service, our PhD scientists, engineers are really the science-based customer experience advantage I was just talking about, we made a decision to not restructure the company and lower the cost base like many, many corporations did. What it did, it basically kept a lot of slack in terms of capacity in 2020 in the business, obviously impacted the margin, but we believe it was the right thing to do. As the global economy recovered in 2021, we are very well positioned to deliver, as you remember, another industry-leading margin for 2021 because we didn't have to hire people back. We had the capability available. We could be nimble. We can be very fast with our clients. As a matter of fact, I mentioned that in previous calls, all of our NPS scores dramatically increased in 2021 because we had this availability of IP at the fingertip when our clients really needed. Of course, we were operating in 2021 below the 2019 level. But as we moved into 2022, we start having businesses, and this is the third question, were we are ahead of 2019 in terms of demand and revenue? And as you know, we have people-based business. And when you basically need to build capability, you need to hire, train and make sure people are fit for the customer service you want to deliver. And we have a very technical business. So the reason why we are talking about investments being impacted by inflation because where we need to hire additional capacity, and it's essentially in most of our product line businesses that are ahead of 2019 and in our Minerals business in Australia, of course, the cost of doing business has increased in the meantime. And as we recruit, we have to pay higher, obviously, dollars to recruit these colleagues. That's what basically is creating a bit of inflation on our cost base. Now if you go back in time and if you look at Intertek performance for the last many years, you will see that we are always able to grow our revenues slightly faster than our cost, delivering margin accretion. If you look at, obviously, '21 in the first half, you will see that for the first time, given what I've just explained, our cost is growing 1% faster than our revenue. Now there is no question in that the China impact is having effect here because we kept our capability in China, and obviously, we had less revenues. But the point is that this is our business. We are people-, science-based business. When there is demand, you need to build a capability. We are investing in that. It's costing slightly more. Now the way we deal with wage inflation, we have a very disciplined approach. We basically believe in long-lasting customer relationship. We basically pass 50% of the wage increase through inflation and the rest is being offset through productivity. So if you look at H1, what happened, essentially, our like-for-like revenue growth was 2/3 volume, 1/3 price. The inflation in these markets where we have to invest in capability and they are essentially, you know them well, U.S., Canada, U.K., Europe and Australia, is higher than we expected. And as we see more demand, we invest to build a capability, and we're going to take additional prices in addition to the price increase we took in the first half to basically offset that, and it will take time to normalize. Look, I'm not worried. I mean we are in a great position. We have high demand than we were expecting. And therefore, we need to hire. And I'm just giving you an example. Right here in the U.K., we run a very leading edge pharma business, which is the leading expertise worldwide in terms of drugs being delivered through nasal devices, right? The amount of research that is happening in the nasal devices to give molecule that will make us healthier is incredible. However, to tell you that, we believe in the industry, that not in 2023, but in 2014, COVID-19 vaccine might be delivered through nasal spray. We are working on that. Now our clients come to us with initial orders. And we said, "You know what, this is the right thing to do. We're going to have a big impact in society. Let's hire, train and make sure that we've got the people to deliver capabilities." So look, this is the business we are in. What different this time around is the fact that the inflation is higher than expected in more markets than typically we operate. We've always had to deal with that in certain markets. But as you know, inflation is a big concern. So that's what's happening. I'm not worried. I will be worried if we had inflation and lower demand, and we have high demand and inflation to deal with. We got pricing power. The strong lasting relationship with customers, I talked about, are real. We do 6,000 to 7,000 customer survey every month. Our NPS is really the best in the industry. So we are well positioned to deal with that. But is going to impact obviously our margin in the second half in addition to the divisional mix effect I just talked about.

Next question comes from the line of Rory McKenzie from UBS. .

Just 2 for me, please. Can you just -- clarify some of the H1 2022...

Rory, can you speak louder? I cannot hear you very well. Sorry, the line is a bit difficult.

Can you just firstly say what the H1 '22 margin was inside China and outside China and how that trended year-over-year? And then, secondly, you're clearly talking about more price increases, more demand accelerating. You haven't changed your full year growth guidance. So I guess I'm just trying to work out what's changed from the 25th of May statement to today, kind of change your margin outlook overall, if that makes sense.

Yes. I mean, look, on the first point, we don't disclose our margin by region. It's commercially sensitive, as you can imagine. But there's no question that our margin in China was down and outside of China, the margin was 20 basis points higher, right? What's basically in our new guidance, if you want, is we expect revenues to continue to be very, very robust, right? As you know, there is quite a bit of ForEx acceleration that will obviously change the revenue for the company, and I'm sure you've worked it out. As I just explained, the margin guidance is based on a few things, the impact in H1 of the lockdown in China. The fact that divisional mix is a bit unfavorable from a margin standpoint, and we are having to invest more than we thought to cope with the acceleration of demand in this high inflationary market. And the other thing I said, which I wanted to make sure that everybody remember because I'm not sure everybody had put that in their margin model. We had GBP 10.5 million of additional government subsidies in the margin that we delivered in 2021. It was industry leading, as I said. But this is also important to understand when you get your H1 and H2 because 1/3 of the benefit was in H1 and 2/3 was in H2. That's basically what has changed, nothing more.

And just a follow-up. Maybe you can talk about your -- in terms of your headcount plans. Do you think you're still aiming to get to the same total headcount by, say, December of this year as you planned before? It's just the cost of getting there that's changed? Or do you think you're also now planning to have a higher headcount given the demand drivers you've been talking about?

There is no question that we are having to increase our capability, which is additional headcounts, of course. We expect our headcounts to continue to progress.

Next question comes from the line of Sylvia Barker from JPMorgan.

Can I check, firstly, on the good growth in China. Could you just talk a little bit about what that growth, how you see that growth developing, I guess, after the lockdowns? I suppose there's not that much maybe catch-up from your -- based on your comments and maybe all the different businesses within that mix are doing. Then secondly, on the price versus wage inflation point. At what point during the year do you think you might be able to kind of fully match that to a point where that's not a drag on the margin anymore? And then finally, both Food and AgriWorld actually did very well in the context of what's happening in the world. So could you maybe talk a little bit about the drivers there and the outlook for the second half?

Yes, thanks. Look, as far as H2 in China, the way we think about it, we think about it differently for the testing business that we do versus the inspection, assurance and certification. Let's start with the testing, right? If a collection has now been produced in the month of April for the North American market, when the factory is producing in July and August, they are producing for the next, obviously, collection, right? So what has not been produced will not be reproduced again. And therefore, factories will operate at full capacity, but dealing with the new orders. So we don't expect much catch-up there. As far as inspection, assurance and certification, which are obviously more long-term projects, or people can delay assurance, inspections and certification work, I think there will be a bit of catch-up there. That's our view. As far as the price wage inflation, look, this is a very personal question. As I said, we got some really good price increase in line with our plans in H1. We have got pricing power. We have plan to take pricing. We took them, and they were obviously embedded in our H1 numbers. As far as the additional price increase we are taking, look, this is a B2B business. It takes time to reach out to every single customer that cannot go on TV and say, "Hey, it's a new ATIC solution that did in your price and you can order online." So it takes time. And my sense that it is going take us until the end of the year to get all these prices embedded and we're going to start 2023 with the effect in the base. So I'm not too worried about it. That's the way we do business. And as I said earlier, we're doing it for the right thing because we've got growth, and we need to make sure we've got the capability to help our clients. Look, Food and Agri, these are 2 extremely strong businesses at Intertek. I mean the growth drivers are very, very easy to understand. While population is growing, food consumption is growing. Concerns on health and safety and quality and sustainabilities are increasing. I mean, I think I talked about it in one of the previous calls, the number of prior recalls that we've seen during the last 2 years has been incredible because of the risk I was just talking about. And companies are worried. I mean you just need to look at what's happening in the infant nutrition category that I know so well was my previous time at record, look at what's happening live in North America, one of the best governed countries in the world in terms of food safety. I just give you an indication of the issues. And as I talked at one of the conference the other day, right, the issue in Food and Agri is not the standards. The standards are there. The problems are that the governments are not enforcing these standards. And as you know, I spent quite a bit of my career in the food industry, both at Pepsi and Burger King. I can assure you that in my 11 years of Burger King, I rarely had any local or national authorities coming and checking the safety of all the ingredients in our kitchens. Obviously, I had due processes in place. So that's the word we're in, and I don't want to create too many stories. But if you have time and ask your favorite restaurant to show you how clean the kitchen is, and it might not be your favorite restaurant anymore.

The next question comes from the line of Maddy Jobber from Morgan Stanley.

This is actually Anvesh Agrawal. I got 3 questions as well. First, it looks like there is a bit of a slowdown in May, June within transportation and technology business within the products. If you can sort of dwell on that, what's driving that? Second, I saw a bit of a sort of downgrade or lowering of the range on the CapEx compared to the full year guidance. And given the inflation investments you're talking about, I was wondering what's driving that? And then finally, just to clarify on the subsidy amount. I know the incremental was like 10.5 last year, but if you can comment on what was the total subsidy number? And is the only incremental subsidy going away? Or where is that sort of -- what's the source of that subsidy, really?

Yes. So look, as far as Transportation Technology, look, the Transportation Technology business was impacted in May, June by the China lockdown. We have a big business there. And of course -- and it's in Shanghai. So that has impacted the run rate. So that's essentially the main driver. I think the issue on CapEx is not an issue. I mean, look, when we give a range, it's a range. We are at the low end of our range for now based on the CapEx forecast we did. It could be higher. We are not CapEx constrained. If there is a great idea at Intertek, being technology, innovation, new sites, we invest, provided it's the right segment, the right growth, right margin, right return. So I am not worried about it. In terms of the subsidies. We typically, if you look at our disclosure, we typically get around GBP 5 million of subsidies on average. And it was GBP 10.5 million in addition to this GBP 5 million. That's why I think it's important for your margin model to recognize that. And when you look at your margin for the second half, look at it ex subsidy, which I think is underlying, and you will see that the margin looks pretty good.

So just to follow up, do you expect that normal GBP 5 million to continue. That is not going away, right? So the delta is on the GBP 10.5 million...

Look, yes, I mean that's -- and then if it's different, we'll tell you at the end of the year. But as you can imagine, forecasting government subsidies is not something that we are the experts in the world. But that's what we get on a normal basis, right?

Yes. And just on Transportation Technology, sorry, like even ex China, if you look, the growth was like low-single-digit in first half and it was mid-single-digit Jan to April. So it looks like it slowed even ex China?

Yes. So well spotted, that's what your question was on goal. So basically, we've seen a bit of a baseline effect in our U.S. lubricant testing operation in San Antonio. [indiscernible] market is a big market, and there is regulatory situations where there is no new regulatory drivers this year, and therefore, there's a bit of a slowdown. But as you know, -- companies need to invest in sustainable [indiscernible]. So it's just a temporary effect. We run a great operation. If you are in Texas, I'm very happy to invite you there. You will be amazed by the type of testing we do there, fascinating.

The next question comes from the line of Arthur Truslove from Citi.

So first one for me, just in terms of oil volumes at Caleb Brett. Are you able to just give us an idea, both for the first half as a whole and also for May and June, how far behind 2019 are we in terms of oil volumes? And sort of secondly, kind of following on from that. In 2019, you obviously delivered over GBP 80 million of adjusted EBIT in the Trade division. Is there anything that sort of stops you getting back there? And what needs to happen to get you back there, if that makes sense? And I guess the third question is, obviously, a lot of your peers have talked about margins going up in the second half, reasonably significantly. Just to be clear, are you expecting margins for the group as a whole to go up materially in the second half?

Okay. So on your first question, look, the best way to look at the market in the downstream segment, which is where Caleb Brett is, is to look at supply and demand of barrels of oil per day, right? So at the moment, right, we are in around 97, 98. And obviously, at the peak, we were obviously higher than that, right, in the 1 or 2, 1 or 1.8. So we are not back to the level of demand that we saw in 2019. No question about it. And of course, our intention is to go back to the previous peak and to go beyond. And as I talked about in the call in the commentary that I made during the call earlier today is that the oil and gas market is going to continue to grow because there is just not enough renewable energy to basically go to net-zero at the speed that people want to. So the growth outlook is very, very positive for many years to come. We have our own model, and it will be probably too detailed for the call today. But the growth is very, very positive. And there is no question for us. We'll go back to our peak. I'm not putting a time on that because the market has changed, and we're going to need to do that step by step. But the growth is very, very, very impressive, and we are outperforming the industry at the moment, right? As you know, in terms of margin, we don't give quantitative guidance. In terms of margin for the full year, we give quantitative guidance and our second half is always stronger than the first half. And of course, in the second half, we will not have the dilutive effect of China. So yes, our margin in the second half will be stronger than the first half.

Sorry, sorry, just following up on that. Is the second half margin likely to be stronger than it was in the prior year? That was what I meant, sorry.

And that's the guidance we're not giving. We are giving you quite a bit of data to work through your models. And what I would advise you to do is you look at last year's performance in terms of margin, which was very strong with and without the subsidies, and you will see that based on our guidance, to get to what we have guided qualitatively, the margin in the second half will be a good performance.

[Operator Instructions] The next question comes from the line of Neil Tyler from Redburn.

Two, please. Firstly, following up on Sylvia's question earlier about and the answer you gave around the China momentum in the second half. Can you remind us what the split is in your China business between those testing activities that you think have probably permanently lost and inspection, certification, assurance that might see some catch-up? That's the first question. And then secondly, regarding capital allocation, M&A, obviously, another interesting deal announced today. And it seems that there are a few more interesting acquisitions coming your way. How does the M&A pipeline look from here, both in terms of opportunities, but also valuations and your capacity to sort of continue to identify and integrate any deals?

I mean, let's deal with M&A first. The industry, as you know, is very interesting in terms of consolidation. We tend to be very selective. We believe in investing our capital in the high-growth, high-margin segments on a sustainable basis. And there is no question that there are quite a few companies like GLA, like SAI out there, that would basically bring an IP in a high-growth space opportunity like solar energy or food in Latin America. And these are the type of deals that we like, right? We bring a very strong IP in a high-growth, high-margin segment and we scale it up. We tend to move away from low-margin businesses. As you know, this is not what we do. And if anything, I would say that in terms of M&A, the environment is going to be favorable for companies like Intertek. As you know, debt market has dried up very quickly in the second quarter. It's very difficult for private equities to raise any significant amount of financing. And companies that are going to want to monetize the assets will be slightly more reliant on strategic buyers like us. So if anything, there will be slightly less competition. It doesn't mean that we're going to do the wrong thing. But I would say that the M&A market looks very, very promising for a company like us, where we are clear about where we want to invest. We've got the balance sheet to get the funds. And certainly, we know how to integrate and execute this. Look, as far as the mix of our revenue by solution, as you know, this is not a disclosure that we do regular basis. As I promised in one of the other calls is something we'll do at the end of 2022. But as can we report, if I'm correct, Denis, was in 2018, right? And at the time, at the group level, Assurance was 16%, Testing 53%, and Inspection 22% and Certification was 9%. So that's the group number. Look, I would be surprised if it's materially different for China, given that China is a good reflection of our global supply chain.

So can I just quickly follow up on the point on M&A. Can you remind us, is there any -- in your margin guidance, is there any meaningful year-on-year accretion dilution from the deals that you've done at last -- and then particularly in the second half of the year?

Well, I mean, as I just said to, unfortunately, we do not give quantitative guidance. But if you look at H1, you will have seen in Jonathan's slides that acquisitions had a positive impact on margin because the GLA and SAI businesses were margin accretive for us. That's the kind of deals that we like, right? So that should continue, right?

There are no further questions in the queue. So I'll hand the call back to your host for some closing remarks.

Well, thank you very much for your time today. I know it's a very busy season. So we look forward to catching up. Denis is on standby if you need any call, and have a good day. Thank you.